Free Tip: Customer Habits

It probably won't surprise you to learn that you interact with posts that have the word "free" in the title at least three times as much as you interact with ordinary posts, ordinary posts that also offer free information.

We are conditioned to respond to certain words, perceiving that some words are more valuable than others.

Our customers are conditioned to certain behaviors as well. Once the customer gets in a habit, the customer tends to maintain the habit.

Let's look at two examples of customer habits.


Catalog vs. Internet Buyers

I am most often asked by catalog marketers how they can minimize catalog expense while maintaining sales. One way is to simply look at customer habits.

Step 1: Retrieve the channel of the last four purchases placed by your customers. Categorize each purchase by channel.

Step 2: Measure the percentage of customers who purchased via the internet or catalog channel in their most recent purchase as a function of the channel used in the past three purchases. You are likely to see several patterns:

• Customers who placed their last three purchases via the phone/mail channel probably have a 90% chance of placing their next order via the phone/mail channel. Guess what? These customers need catalogs. This works for both you and your customer. You love mailing catalogs, it is a habit of yours. Your customers love buying from catalogs, it is their habit.
  

• Customers who placed their last three purchases via the online channel probably have a 90% chance of placing their next order via the online channel. Guess what? These customers probably don't need as many catalogs (if any). Free Tip: Aggressively test contact frequency within this audience. Save yourself considerable expense and increase profit. Sound good?!
  

• All other customers are in a state of transition. Pay attention to the customers who placed their past two orders within the same channel. These customers are about to form a habit.

E-Mail Responders vs. Internet Visitors

If we believe that e-mail marketing is relevant, then we should participate in the identification of customers who visit our websites because of e-mail marketing.

Take the concepts outlined for catalog and online buyers, and apply them to those who visit your website. If the past three visits happened because of e-mail marketing, you have an engaged customers who is in the habit of using e-mail marketing to interact with your website. Imagine the potential that exists in this relationship.

If your e-mail marketing falls upon deaf ears, then you have a customer that gave you an e-mail address for unspecified reasons, but is not in the habit of visiting your website due to e-mail marketing.

When this happens, what is our response? We try to FORCE A HABIT upon this customer, don't we? We demand that the customer respond to our own marketing habits, we go to great lengths to change the habits of the customer. Will you change your habits in exchange for free shipping on orders over $175? No? Ok, will you change your habits in exchange for free shipping on all orders? No? Ok, will you change your habits in exchange for free shipping on items that have been discounted by twenty percent? And on and on we go.

And then we get frustrated with the fact that our customer base will only respond to discounts and promotions in the subject line of an e-mail.


The Secret Sauce, Your Free Tip:

We marketers experience success when we work within the naturally occurring habits our customers already exhibit. All too often, we seek to change habits, and impose behavior upon customers. Segment your customer base by customers who exhibit consistent habits, and market to the strengths of your customer base.

When Is The Best Time To Send A Catalog To Support A Retail Event And Drive Multichannel Sales?

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I'm often asked what the best timing is for sending a catalog that supports a retail event. Here are a few guidelines for you to consider.

Let's assume you want to mail a catalog to support a retail event.

First, identify (via test and holdout groups, not via matchback analytics) the channel that benefits most from the mailing of a catalog. If the channel is the telephone channel, you'll probably have to mail the catalog at least three weeks ahead of the event, with a Monday/Wednesday in-home date. If the channel that benefits the most is the retail channel, you'll probably have to mail the catalog 1-2 weeks ahead of the event, with a Wednesday/Friday in-home date.

Similarly, you ask yourself who the majority of customers receiving this mailing are. Catalog/Online customers prefer Monday/Wednesday in-home dates, while Retail customers prefer Wednesday/Friday in-home dates.

The combination of these questions yields a matrix that tells you when to send the catalog, and tells you the expected performance of the catalog on a grading scale of "A" (excellent) to "F" (poor).

In many cases, the management of the dominant channel in your brand will require you to execute your mailing to give their channel the best chance of success. The grid helps explain the impact of compromise --- one of the things that multichannel pundits don't talk about much --- the fact that compromises to accommodate channels reduce the overall ROI of a catalog campaign.

Nine Ways Catalogs Interact With Websites

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Spending two days at a multichannel marketing conference helps crystallize one's image of where our industry is heading.

My biggest revelation from 12,000 miles of travel and two days of multichannel discussions is that we have not given business leaders the tools necessary to identify the roles channels/advertising play in what used to be the Catalog industry.

So here are nine ways that catalogs interact with websites. For each classification, think about how different the marketing strategies need to be to yield satisfactory business results. Which of these nine situations is your business classified in?


Dissimilar Customer Audience: When catalog is in isolation, and the online channel is in isolation, you have two completely different customer audiences purchasing from each channel. You have a multichannel business, one that your customers don't use in an integrated manner.

Tries Online, Prefers Catalog: Infrequently, catalog is in isolation while the online channel is in equilibrium. This used to happen in the late 1990s, when catalog customers tried to purchase online, only to find the purchase experience preferable via the telephone. Today, businesses with a target customer between the ages of 65-85 might be in this situation.

Online Channel Is Not Appealing: When customers shop online, then transfer their sales back to catalog (catalog = isolation, online = transfer), you know that the customer does not find the online experience appealing. This usually represents a good time for a site redesign.

Classic Channel Shift: The most common catalog scenario occurs when catalog is in equilibrium and online is in isolation. This means the catalog is driving sales online, and when the catalog succeeds at doing this, the customer tends to stop using the telephone to place future orders. Long-term, this spells trouble for the catalog as a purchase channel, and is a harbinger of significant change for the catalog as an advertising vehicle.

Outside of the catalog industry, think about other business models that are going through this transition (old channel = equilibrium, new channel = isolation):

• CDs to MP3s
• Newspapers to Online News
• Gasoline-fueled Cars to Hybrid/Electric Cars.
• CRT Computer Screens to LCD Computer Screens.
• Desktop Computers to Laptop Computers.
  

Classic Multichannel Business: Multichannel pundits suggest that many catalogers exist in this situation (catalog = equilibrium, online = equilibrium). In other words, in this situation, customers freely pick and choose the channel they wish to purchase in. Products and solutions from the vendor community are frequently created to solve the challenges faced by companies in this situation. Unfortunately, few catalogers are in this situation.

Over-Marketing: Catalogers that offer a myriad of promotions to get customers to purchase online occasionally find themselves in this situation (catalog = equilibrium, online = transfer). The customer shops online only when prices are cheap or promotions make the online channel temporarily irresistible!

Catalog = Brand Advertising: When catalog is in transfer mode, and the online channel is in isolation mode, the catalog marketer is gearing up for a big change. Telephone shoppers are leaving in a mass exodus for the online channel. Once online, the customer won't shop via telephone again. Long-term, the catalog strategy is likely to change for a company in this situation. The catalog will likely evolve into a potentially useful brand advertising vehicle that communicates the broad assortment of merchandise available online.

Catalog = Sales Driver: When catalog is in transfer mode, and the online channel is in equilibrium mode, it is likely that the catalog is a very effective selling vehicle. The customer does not perceive differences between the channels, willing shopping via telephone or website. Better yet, the catalog is causing online orders. Long-term, this business model has a good chance of having a viable catalog advertising vehicle.

Ideal Multichannel Business: I have yet to see a catalog business operate in this mode (catalog = transfer, online = transfer, yielding true oscillation between channels). This would truly represent multichannel nirvana!

Does A Website Drive Sales In Retail Stores?

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One of the more flummoxing issues facing multichannel retailers is quantification of the sales that a website drives to a retail store.

There aren't a lot of "best practices" for quantifying this issue.

Some folks want to give the website credit for any purchase initiated online. For instance, if a customer ordered online, and picked-up the item in-store, some folks want to give the website "credit" for that order. Some feel that any retail purchase that was researched online deserves to be credited, at least in-part, to the online channel.

Retail folks will claim that without stores, the website never would have existed, and therefore, the stores should get credit for all orders, even orders that happen online. Many retailers include online sales in their comp store sales calculation --- artificially propping up tepid retail comps with +25% online growth. Read the 10-K statements issued by retailers, you'll see that this is a common practice.

Multichannel Forensics can be used to simulate what might happen if a website no longer existed, was no longer there to support store sales.

Using this free spreadsheet, the analyst can plug in retail/online metrics, view the forecast, then zero-out the online portion of the business.

In the attached example, retail sales were growing at about four percent per year. Once the website is shut down, the simulation suggests that retail sales stop growing. Of course, all web sales disappear as well.

Theoretically, some assumptions can be made for perceived cannibalization between retail and online sales. In lieu of the actual, quantifiable metrics, this example shows that the website probably has a real, long-term impact on retail sales.

Plug the dynamics of your business into the spreadsheet. You can get an introductory view into the impact your website might have on retail growth.

Multichannel Retailing Week: Inventory Management

One of the most under-appreciated jobs in Multichannel Retail is the title of Inventory Manager.

The inventory manager supports the merchant. By looking at sales history, the circulation plan, the e-mail marketing plan, the online marketing plan, and traditional advertising, the inventory manager determines how many units of an item to purchase.

Multichannel retailing made inventory management very challenging. Five issues really challenge the inventory manager.

First, inventory managers have to deal with different measurement techniques in different channels. The catalog/telephone channel captures "lost sales". In other words, when a customer calls to place an order, and the item isn't available, the fact that the customer "wanted" to purchase this item is recorded. This is a huge benefit that catalogers have over retailers. If 1,000 units were forecast, and customers "wanted" to purchase 1,850 units, the inventory manager has access to this data. Next year, the inventory manager will order the appropriate number of units. In retail, once the 1,000 units "sell through", there are no more units to purchase. In retail, there is an art to forecasting what would have sold. The online channel strikes a balance between cataloging and retailing, in that "lost sales" can be captured by the multichannel retailer, if management is willing to capture the information.

The second challenge facing multichannel inventory managers is the information systems they get to use. Catalog/Online systems are frequently different than Retail inventory management systems. The systems don't always talk to each other, and the systems occasionally utilize different metrics. This means that folks working in catalog/online channels view the business differently than folks working in the retail channel. Different skill-sets evolve. In some ways, it is like the catalog/online inventory manager speaks Spanish, while the retail inventory manager speaks Portuguese. The multichannel CFO plays a key role in this relationship. If the CFO understands the importance of linking disparate systems, staff can evolve to speak a common language. Linked systems, however, need to accommodate the unique measurement differences between channels. This does not always happen in multichannel retailing. If retail wins out, it is possible that demand will not be captured in the catalog channel, sub-optimizing catalog marketing activities.

The third challenge multichannel inventory managers deal with is the information captured in inventory management systems. In most cases, changes in marketing strategy cause significant changes in unit sales. For instance, a drop in circulation depth of twenty percent frequently yields a ten percent decrease in sales. Featuring an item in an e-mail campaign may drive a fifty percent increase in sales of that item. Paid search can influence item sales. In most cases, the inventory manager does not have an organized information system that allows the inventory manager to analyze the simultaneous influence of all of these factors. Really talented inventory managers tabulate their own information system in spreadsheets, and build good relationships with circulation, e-mail marketing and online marketing individuals.

Fourth, not all items sell at the same rate in all channels. Items that are prominently featured in catalogs sell well over the telephone, sell at an average rate online, and may not sell well in retail stores. Items featured in e-mails cause online sales to surge, but may not drive any retail or telephone sales. The audience purchasing via telephone, online, and stores is frequently different. The telephone audience is often older, and lives in rural areas. The online customer may be younger, living in the suburbs. The retail customer lives near a store. Differences in demography and lifestyle cause each item to sell differently, by channel. The inventory manager does not usually have this type of information available in a systematized way. The inventory manager has to make a lot of guesses, in order to be accurate.

Fifth, the inventory manage has to be really accurate, but is not given the tools necessary to create accurate forecasts. If too much merchandise is purchased, then overstock occur, costing the company a ton of profit. If too little merchandise is purchased, sold-outs and lost-sales occur, costing the company a ton of profit. The inventory manager is constantly hounded by merchandising and financial staff members to be accurate. The reward for being accurate is harvested by all employees. The risk for not being accurate falls upon the inventory manager.

Over the next ten years, we will see an inventory manager from a multichannel retailer create an inventory management system that integrates the issues listed above. Many vendors try their hardest to do this today. I believe somebody will figure out how to leverage all of the spreadsheets clogging network drives at multichannel retailers, allowing the multichannel inventory manager to be more effective. This information will be combined with clickstream data --- sales information, marketing information, and the items customers viewed on the website will be combined in a way that allows inventory managers to do a better job.

With luck, CFOs will agree that these systems are needed, and will spend the money to implement them.

Until that happens, the complexity of a multichannel business will continue to challenge inventory managers. These folks are frequently compensated at or below the company average for professional staff, but bear more risk than the average employee.

Your turn. What is your view of multichannel inventory management?

Explaining The Matchback Mistake

Now that I've frustrated many of you by not aligning with catalog industry best practices (i.e. the right way to implement results from a "matchback" analysis), allow me to explain the philosophical issues surrounding the methodology.

Catalogers like to look at a "segment" of customers, folks with similar behavior, folks with consistent future performance.

For instance, assume it costs a cataloger one dollar to mail a catalog. Also assume that thirty-five percent of all demand flows-through the p&l, resulting in "contribution" or "variable operating profit".

We mail a catalog to this segment of 10,000 customers, folks who last purchased within the past three months, and have spent $250 - $499 in their lifetime with the company.

By measuring source codes, we learn that this segment spent $2.00 per customer over the telephone. We run a profit and loss statement, and observe the following:

Households	10,000
Demand	$20,000
Flow-Through	$7,000
Book Cost	$10,000
Contribution	($3,000)

In other words, we lost money mailing this segment of customers.

This is where the matchback analysis comes in. Savvy catalog marketers partnered with list processing and compiled list vendors to "match" all customers who received a catalog, but ordered online instead, "back" to the catalog mailed to the customer. Typically, the most recent catalog mailed gets credit (and we can address all the flaws with that methodology another day).

In this instance, the "matchback" analysis shows that customers mailed this catalog also spent $2.00 online during the life of this catalog. This changes the profit and loss statement, illustrated below:

Households	10,000
Demand	$40,000
Flow-Through	$14,000
Book Cost	$10,000
Contribution	$4,000

Now all is good in the world! The catalog drove online volume, the profit and loss statement works. Catalog list processing vendors, compiled list vendors, paper vendors, and list rental vendors rejoiced because the catalog becomes a viable marketing vehicle responsible for the majority of the online volume harvested by a business.

This strategy works well when the online channel is incapable of generating its own volume. In 2007, this is often an incorrect and dangerous assumption. This is where mail/holdout testing comes into play.

Simply put, mail/holdout testing shows you how much online volume occurs if a catalog isn't mailed. The methodology points out the fundamental flaw in a matchback analysis.

For many catalogers (certainly not all, maybe not even half), half of the online demand will happen anyway if a catalog is not mailed. In these instances, the mail/holdout testing clearly illustrate this finding (see the last article, business model number three).

In the case of our profit and loss statement, adding in one dollar per customer instead of two dollars per customer changes the profit and loss statement, illustrated below:

Households	10,000
Demand	$30,000
Flow-Through	$10,500
Book Cost	$10,000
Contribution	$500

In this case, the segment is above break-even, so depending upon your profitability criteria, the segment can be mailed next year.

It is this last profit and loss statement that catalogers need to be evaluating.

Almost all catalogers are mailing too many catalogs due to flaws in the implementation of the matchback analysis. This isn't the fault of your list processing or compiled list vendor. It is our fault, we failed to adequately understand customer behavior.

At Nordstrom, when we killed our catalog division, our online division actually continued to grow sales, year-over-year. Matchback analysis suggested that killing the catalog would create a catastrophe. Our inventory management team nearly fainted, thinking the implosion would be epic!

Mail/holdout testing accurately forecast a subtle sales hit that would largely be offset by organic growth in the online channel. Within a month of killing the catalog, we observed that mail/holdout testing was right, that matchback analyses were highly flawed.

Another flaw in the implementation of matchback analysis is attributing online orders to the original source (which in most cases, is catalog).

In other words, the catalog marketer gives the online channel credit for taking the order, but says that the order could never have happened had catalog marketing not been responsible for originally acquiring the customer. This analytical technique assures that catalogs will always gain too much credit --- in these cases, I've seen orders generated by paid or natural search (i.e. Google) attributed to catalogs, because the customer was acquired via a catalog twelve years earlier. I'd stay away from this popular method of attribution.

I realize what I am saying is utter heresy to most in the catalog industry, as evidenced by the feedback I receive from you! As leaders, we have a responsibility to maximize sales and profit in the business models we support. Let's measure the evolution of our business in a fair manner. We need to take our catalog silo hat off, and put our brand hat on. We'll still find that catalogs are an important part of the marketing mix used to educate customers about our merchandise offering.

Expanding Upon Multichannel Business Models

We really lit up the readership meter yesterday when we discussed Multichannel Business Models. Monday was one of the top five traffic days in the history of the blog, that post was the most read post of the day by a wide margin.

I'll take that as affirmation that multichannel business models are of interest to you, the loyal MineThatData reader. Let's expand upon yesterday's discussion.

A common question I hear is "How do I, with the data I have available to me, determine which business model my brand is classified in?" Good question! Let's explore each business model, and some of the things you're likely to see. We'll explore each business model by looking at results from mail/holdout tests, comparing dollar per customer metrics.


Model #1 = Simple Online Presence

Incremental Value Of Catalog Marketing
		Other
	Catalog	Catalog	Online	Retail	Total
	Demand	Demand	Demand	Volume	Volume
Mailed Segment	$3.00	$7.00	$0.25	$0.00	$10.25
Holdout Segment	$0.00	$8.10	$0.05	$0.00	$8.15
Increment	$3.00	($1.10)	$0.20	$0.00	$2.10
Incremental Results:		$2.10 / $3.00 =		70.0%
Matchback Analysis:		$3.00 + $0.25 =		$3.25

Notice that almost no online demand is generated by the mailing of the catalog. Also, if the catalog is not mailed, virtually no online sales occur. This clearly tells you that the website is just "there", customers are not really using it to order merchandise.


Model #2 = Online Order Form: Check out the differences in this table:

Incremental Value Of Catalog Marketing
		Other
	Catalog	Catalog	Online	Retail	Total
	Demand	Demand	Demand	Volume	Volume
Mailed Segment	$2.00	$7.00	$2.00	$0.00	$11.00
Holdout Segment	$0.00	$8.10	$0.10	$0.00	$8.20
Increment	$2.00	($1.10)	$1.90	$0.00	$2.80
Incremental Results:		$2.80 / $2.00 =		140.0%
Matchback Analysis:		$2.00 + $2.00 =		$4.00

Notice how different this table looks. In this business model, demand is driven to the online channel when the catalog is mailed. Notice that almost no online demand occurs in this scenario. So, the catalog drives orders online, but the online channel is not yet capable of generating its own incremental volume. The online channel is a glorified order form.


Model #3 = True Catalog Multichannel Model

Incremental Value Of Catalog Marketing
		Other
	Catalog	Catalog	Online	Retail	Total
	Demand	Demand	Demand	Volume	Volume
Mailed Segment	$3.00	$7.00	$3.00	$0.00	$13.00
Holdout Segment	$0.00	$8.10	$1.50	$0.00	$9.60
Increment	$3.00	($1.10)	$1.50	$0.00	$3.40
Incremental Results:		$3.40 / $3.00 =		113.3%
Matchback Analysis:		$3.00 + $3.00 =		$6.00

Notice the significant differences in this business model. If the catalog is not mailed, half of the online demand occurs anyway. This is a view that many catalogers are missing these days, due to an over-dependence upon matchback analyses. In this case, $3.40 of demand per customer were generated. However, the matchback analysis indicates that $6.00 of demand per customer were harvested. If the cataloger goes with the latter, the executive team will significantly over-circulate catalogs, causing profit to be sub-optimized. This is probably the most significant analytical error happening in our industry these days --- our list processing, compiled list vendors, industry experts and and paper representatives have unknowingly pushed us down this path, and we let it happen. Nobody is to blame, it's simply our responsibility to do a better job of analyzing the business models we manage.


Model #4 = Retail Business, Catalog Heritage

Incremental Value Of Catalog Marketing
		Other
	Catalog	Catalog	Online	Retail	Total
	Demand	Demand	Demand	Volume	Volume
Mailed Segment	$3.00	$6.00	$3.00	$3.00	$15.00
Holdout Segment	$0.00	$7.00	$2.00	$2.00	$11.00
Increment	$3.00	($1.00)	$1.00	$1.00	$4.00
Incremental Results:		$4.00 / $3.00 =		133.3%
Matchback Analysis:		$3.00+$3.00+$3.00		$9.00

These results are interesting. In a true multichannel version of a catalog business model, volume is spread across other catalogs, the website, and retail stores. Typically, the catalog will drive modest amounts of volume online, and to stores. Notice that online and store channels still get a ton of volume, even if the catalog is not mailed. In these cases, matchback analyses are flat-out wrong --- much care needs to be taken to accurately read matchback analyses in a retail environment of this nature.


Model #5 = Online Business, Retail Heritage

Incremental Value Of Catalog Marketing
		Other
	Catalog	Catalog	Online	Retail	Total
	Demand	Demand	Demand	Volume	Volume
Mailed Segment	$1.00	$4.00	$5.00	$20.00	$30.00
Holdout Segment	$0.00	$5.00	$4.00	$19.00	$28.00
Increment	$1.00	($1.00)	$1.00	$1.00	$2.00
Incremental Results:		$2.00 / $1.00 =		200.0%
Matchback Analysis:		$1.00+$5.00+$20.00		$26.00

These business models are also fascinating. Notice that catalog advertising plays a very small role in influencing business results. Online demand and retail volume are barely moved by the mailing of a catalog. Yet, in total, the catalog is twice as effective as source code reporting would indicate.


There's no need to talk about online pureplays, as catalog dynamics are not part of that equation.

Given what has been shared over the past two days, what are your thoughts? Does this framework make sense? What are you seeing in the business models you manage? Do you agree that matchback analyses are frequently in error, sometimes significantly in error, when measuring the incremental value of a catalog?

Multichannel Business Models

Fifteen weeks as an independent multichannel strategist provide me with a new perspective on multichannel business models. I can see that there are at least six ways that retailers/catalogers are leveraging the online channel, the channel responsible for the "multichannel" moniker. Each business model has unique advantages, and unique challenges.

Model #1 = Simple Online Presence

• These businesses generate the vast majority of their sales by customers who send orders via the mail, or by calling a sales representative in a contact center. The order was stimulated by the mailing of a catalog. The online channel is not a significant driver of sales for businesses in this situation. The customer does not utilize the online channel as a shopping vehicle. At least eighty percent of the net sales happen via the mail, or via telephone. The average customer is at least fifty-five years old.
  

Model #2 = Online Order Form

• These are catalog businesses that use cataloging as the primary marketing vehicle, but provide a robust online experience that causes customers to place their orders online. These businesses struggle with the concept of being "multichannel", because all analytical work indicates that the catalog drives eighty percent or more of online sales. In reality, these businesses are not "multichannel", they are really catalog businesses that take orders online. Still, it is not uncommon for these businesses to generate half of all orders online.

Model #3 = True Catalog Multichannel Model

• It has been my experience that this is the least understood of all business models. These are catalogers that generate at least half of their annual net sales online. However, these catalogers typically believe that the catalog is responsible for driving the online sales. In reality, the online channel developed a foothold in these business models. If catalogs were not mailed to customers, online orders would happen anyway. This is very hard for catalog executives to understand, to digest, to develop strategies against. Company reporting and matchback reporting indicate that the catalog drives online sales. Mail/Holdout testing indicate that at least half of the online sales would happen regardless whether catalogs were mailed or not. These businesses have robust e-mail, paid search, natural search, affiliate, portal and online marketing programs that generate incremental sales. It is this business model that many industry experts and consultants target when they talk about "multichannel marketing".

Model #4 = Retail Business, Catalog Heritage

• These are interesting business models. Be it Coldwater Creek, Williams Sonoma, Lands' End or now Dell, these businesses practice true multichannel marketing, but with a strong focus on ROI. The catalog heritage drives measurement of all advertising activities across all channels. If an aspiring individual wanted the best multichannel lab to build multichannel skills in, I believe these environments provide the best place to gain valuable, portable experience.

Model #5 = Online Business, Retail Heritage

• A Neiman Marcus, Saks or Macy's fit into this business model. The online channel is strictly complementary to the store experience, as the stores are responsible for the lion's share of sales and profit. Management says the right things about multichannel marketing, and do invest in the online experience. That being said, the purpose of being multichannel is to do everything possible to please a store customer. This strategy leads to sub-optimization of the direct channel. Over time, these businesses will lead the online industry in "entertainment". The online channel (and supporting catalog channel) will likely become the entertainment and informational arm of the brand. Of course, a giant retail presence will cause a ton of traffic to migrate online, driving a huge volume of online sales. But the online sales will not be driven by brilliant online marketing or catalog marketing strategies. The online sales will happen because the online channel acts as the entertainment/informational arm of the retail brand experience. There's nothing wrong with this. But it does require a very different set of marketing skills --- traditional online and catalog marketers may be frustrated by this business model. Traditional analytics individuals may not be pleased with the depth of analytical insight required to run these businesses (i.e. the business is run by "brand instinct", not by analytical findings and ROI).
  

Model #6 = Online Pureplay

• These businesses are fundamentally different than the five models described above. These businesses were born online, and utilize a marketing strategy fundamentally different than other businesses. Traffic is driven by online marketing strategies. To compensate for what I call "channel disadvantage" --- not having catalogs or stores, these businesses utilize free-shipping, free-returns, and rock-bottom pricing to gain a competitive advantage. These businesses need to grow to a size large enough to overcome margin and shipping revenue shortfalls. Zappos is probably the best example of a business in this category. The online marketing departments in these companies offer spectacular laboratories for learning online marketing strategies. If I were a college student today, this would be one of my primary industries to target for employment.
  

Strategically, it is very important to understand where your business model falls on this continuum. The way you utilize multichannel marketing and advertising strategies is highly dependent upon the customer base you have, coupled with your heritage and objectives.

Cataloging makes less sense for business models five and six. Traditional cataloging strategies are frequently not congruent with brand-based retail models and online pureplays.

Online marketing makes less sense in the short term for business models one and two. These business models are supported by customers who are not willing to shop on the web without the benefit of catalog merchandise presentation.

Matchback and analytical expertise are probably most critical in business models three and four. Catalog businesses that migrated from model one to model two to model three have the best opportunity to overcome postal increases, because the customers shopping these businesses will purchase online if catalog frequency is reduced.

Your turn, my loyal reader! What e-commerce business models are missing from this list? How might you change these categorizations to make more sense?

Multichannel Marketing And Merchants

Our merchandising organizations provide passion and excitement. Heck, if these folks didn't believe in their product, why would the customer believe in the product?

Back in the day (i.e. pre-internet, 1995), catalog marketing was "the store". Say you mailed 1,000,000 catalogs, and put a dress on a quarter page of the catalog. If you didn't feature the dress, you sold $0. If you did feature the dress, maybe you sold $25,000 of merchandise.

Today, the internet is "the store". The catalog, while still very important, "influences" sales.

Today, you will probably sell $33,333 of merchandise instead of $25,000. However, the distribution of sales will be very different, assuming you run the dress in a catalog to a million folks on a quarter page:

• Telephone Demand = $10,000.
• Online Demand Driven By The Catalog = $5,000.
• Online Demand Driven By E-Mail = $3,000.
• Online Demand Driven By Search = $3,000.
• Online Demand Driven By Affiliates = $1,500.
• Online Demand Driven By Portal Advertising = $1,500.
• Online Demand --- Organic = $9,333.

Notice the difference between 1995 and 2007. Back in the day, a merchant got product in the catalog --- where product appeared, how it was presented, and who saw the catalog made a big difference. The merchant fought for her product.

Today, there are at least a half-dozen different avenues for the same item. There are numerous folks that the merchant has to work with, in order to maximize the sales of the dress she is trying to sell.

Most important, the merchant literally has a "portfolio" of investment options. The merchant doesn't have to feel terrified if the dress is not featured in a module in the e-mail campaign, for example. The e-mail campaign only drives a small fraction of total volume of this item.

Now that I'm running my own sole proprietorship, I get to talk to a lot of people across the catalog/online industry. I'm not convinced that we have done an excellent job of teaching our merchandising friends how different the marketing world is in 2007, compared with 1995. Maybe in some ways, we have yet to figure out how different the world is.

Do Online Conversion Rates Differ By Business Model?

Please click on the image to enlarge it.

Each year, Internet Retailer publishes their Top 500 websites, in terms of annual net sales.

If one is willing to take the time to have information transcribed into digital format, there are interesting tidbits to consider, including information about conversion rates and business models.

In this case, I took the top three hundred sites, and analyzed various performance metrics by the type of business model employed by the brand.

In other words, Crutchfield would be viewed as a cataloger, due to their catalog heritage, whereas Talbots would be viewed as a Retail Chain, due to their retail heritage. Blue Nile would be a web-only business. Sony would be a Consumer Brand Manufacturer. Internet Retailer made these determinations.

Of the three hundred sites, I adjusted the top ten and bottom ten outliers for each metric. For instance, if the top ten conversion rates were 20%, 18%, 17%, 16%, 15%, 15%, 15%, 14%, 14% and 14%, then I adjusted all ten outliers to 14%.

Now for today's tidbit. An analysis of conversion rates by business model indicates that Catalogers have the highest website conversion rate at 4.89%, followed by Web-Only businesses at 3.92%, Retail Chains at 3.05% and Consumer Brand Manufacturers at 2.99%.

Catalogers have natural advantages. They bring in traffic via catalog marketing and online marketing. Retail Chains have disadvantages online, in that websites are used for research that results in an online purchase. Consumer Brand Manufacturers have distinct disadvantages, in that conversion may actually happen at a Cataloger, Web-Only Business or Retail Chain.

For catalogers, the news is encouraging. With postage and paper costs impeding the catalog marketing channel, this provides hope. Undoubtedly, catalog marketing will evolve as the cost structure makes traditional catalog marketing difficult. Catalogers will evolve their online experience further away from "order taking", moving closer to the experience provided by Web-Only businesses. The economics of catalog marketing will dictate this.

For retailers, the news is encouraging. The data may indicate that the retail channel gobbles up between thirty and sixty percent of possible orders. Online marketers within retail businesses have an opportunity to analyze "incremental" profit and loss statements, those that account for the sales that are truly driven by the website. Ultimately, appropriate cross-channel analysis should result in a bigger marketing budget for online marketers in retail organizations.

How Much Do I Spend On Online/Catalog Advertising?

Lands' End was a fun place to work in the early 1990s. There were a lot of interesting minds, tossing around interesting ideas.

One of our debates was about the optimal level of advertising spend. One camp, led by our Circulation Director, believed that you circulate to an incremental 7% pre-tax level (prior to subtracting fixed costs). The theory was that the return on investment had to be sufficient to cover fixed costs ... that if you actually subtracted fixed costs from the equation, you were circulating to about break-even.

Another camp believed that you circulated to -5% pre-tax levels, because this way, you were capturing long-term profit that you were losing in the short term. At the end of five or ten years, your business was much bigger, because you acquired/reactivated a lot more customers than in the situation where you maximized short-term profit.

At Eddie Bauer, we circulated to break-even (prior to subtracting fixed costs), then shifted our strategy to invest to below break-even, in order to maximize the long term health of the business.

At Nordstrom, we tried our hardest to convince folks to invest in online marketing activities that maximized the long term health of the total business. We probably under-invested in the online channel, though we had the data to tell us what the 'right' thing was to do. The process of assigning a marketing budget did not provide us the flexibility to maximize the online channel (and ultimately, to grow store sales). This is a good lesson --- it doesn't matter what data you have, there are internal processes and existing cultures that simply cannot be changed.

In the past, we didn't have the right tools to understand the long-term impact of short-term advertising decisions. With Multichannel Forensics readily available these days, we can simulate different strategies, and identify the best long-term strategy.

I crafted an online/catalog business simulation, and ran three scenarios.

• Scenario #1 = Maximize profit each year.
• Scenario #2 = Maximize total profit over the course of five years.
• Scenario #3 = Maximize profit five years from now --- make that year as profitable as possible.

The table below show the results of the three simulations. All numbers are listed in millions:

Maximize Short-Term Profit
	Demand	Ad Spend	Profit
Year 1	$44.6	$5.6	$2.1
Year 2	$42.0	$5.2	$1.7
Year 3	$40.9	$5.1	$1.4
Year 4	$40.4	$5.0	$1.2
Year 5	$40.1	$4.8	$1.1
Totals	$208.0	$25.8	$7.4
Maximize Long-Term Profit
	Demand	Ad Spend	Profit
Year 1	$59.2	$9.9	$1.5
Year 2	$66.6	$11.0	$2.0
Year 3	$70.6	$11.6	$2.3
Year 4	$72.8	$12.0	$2.4
Year 5	$74.0	$12.2	$2.4
Totals	$343.2	$56.7	$10.6
Maximize Only 5th Year Profit
	Demand	Ad Spend	Profit
Year 1	$66.4	$12.5	$0.6
Year 2	$80.3	$14.9	$1.6
Year 3	$88.6	$16.3	$2.2
Year 4	$93.4	$17.1	$2.5
Year 5	$96.3	$17.6	$2.6
Totals	$425.0	$78.4	$9.5

Let's review each simulation.

In the first run, profit is maximized by year. Therefore, profit in the first year is $2.1 million. However, a much smaller business exists going into year two, with too few customers to generate large volumes of profit. Still, the management team tries to maximize profit in year two, then year three, year four, and year five. As a result, this business actually contracts. If we followed the rules of Wall St. (maximize short term profit), we may not protect the long term health of our business.

In the second case, online/catalog advertising spend is more than twice as much as in the first simulation. This means the business is more profitable in the long-term, and grows at a much faster rate.

In the third case, online/catalog advertising is fifty percent more than in the second case. This yields a marginally profitable business in year one, but in year five, the business is much larger, and more profitable.

For every online/catalog business, these scenarios can be easily created. The multichannel analyst provides management with three or more scenarios (as outlined above), and lets management determine the future trajectory of the business.

This is an important point --- abstract and geeky topics like lifetime value have little or no meaning to executives. Picking from one of three possible strategies is easy to do if you're an executive, and accomplishes the exact same thing as a geeky, technical lifetime value analysis.

Multichannel CEOs and CMOs: Simulations indicate that it is important to invest in unprofitable customer activities in the short term, in order to protect the long term health of your business. It is important not to focus on "this year". Where possible, invest in the short term, to protect the long term health of your business.

Marketers Gone Wild

The Wall St. Journal reports that there will be a concert series called "Social" this summer, in East Hampton, NY. For $15,000 a person, you will get to experience an intimate venue featuring Prince, Billy Joel, Dave Matthews, Tom Petty and James Taylor.

For $15,000, you could feed an impoverished African family of four for fifteen years.

Those of us who do direct marketing, catalog marketing, and online marketing need to pay attention to the socio-economic changes bubbling all around us.

The highly affluent are racing off into another strata. The middle class are being clobbered by the flattening of the world. And woe be to the working poor, earning $14 and hour without ever being able to achieve the dream of a middle-classed, median-priced $400,000 home with a white picket fence in a nice neighborhood.

It's easy for marketers to go wild, to chase the money, to "target" a $150,000 a year household.

Now flip the tables. What could you do that would make the working poor, a person earning $14 an hour making Spam (yes, the meat-related product) in Austin, MN, feel great? You probably don't have to put Tom Petty in front of them.

If we want to increase website conversion rates from 3.04% to 3.12%, if we want more than one in five people to even bother to open an e-mail campaign, if we want people to actually be excited to receive a catalog in their mailbox, we should ask ourselves "Does this marketing campaign make a customer feel great?"

I earned $14 an hour, I know what it is like to have $15 to spend on food and entertainment for an entire week. There were a lot of ways to make me feel great.

CEO Concerns About Reducing Catalog Marketing

Lots of phone calls with business leaders over the past month. All ask me essentially the same question.

Question: "Postage is about to put a squeeze on my expense structure. Should I begin transitioning out of catalog marketing?"

Strategically, there are a lot of things to think about. Listed below are a sampling of the issues CEOs need to consider.

• How old is your average catalog customer? If your catalog customer is 55 or older, you need to embrace your catalog marketing efforts.

• What percentage of your direct-to-consumer net sales come from the telephone? If this percentage is more than fifty percent, you need to embrace your catalog marketing efforts.

• What percentage of your direct-to-consumer advertising budget is in search, affiliates, portals and e-mail marketing? If you aren't already spending at least twenty percent of your direct-to-consumer advertising budget online, you need to embrace your catalog marketing efforts for awhile, until you learn all the ins and outs of online marketing.

• Multichannel Forensics: If prior catalog buyers are in isolation mode (meaning they do not at least try out ordering online), you need to embrace your catalog marketing efforts.

• Testing: This is as good a time as any to hold out catalog mailings to a group of loyal catalog customers for a period of at least six months. When you do this, what happens to online spend? Does it increase, decrease, or stay the same? If it decreases or stays the same, you need to embrace your catalog marketing efforts.

• E-Mail Marketing: A colleague forwarded me an e-mail marketing campaign. The e-mail did not sell merchandise --- rather, it told the customer to look for their catalog in the mail. If your e-mail marketing strategy is to market your catalog, you need to embrace your catalog marketing efforts.

• Customer Acquisition: What happens to new customers if you stop traditional catalog prospecting activities? The future of your business is new customers --- if you don't acquire new customers via the online channel, you need to embrace your catalog marketing efforts.

• Paid Search: When you analyze paid search performance, do you find that customers ordering via paid search also received a catalog? If so, you need to embrace your catalog marketing efforts.

• Online Marketing Budget: What happens if you double your online marketing budget? What is the impact on online sales? If you don't know the answer to this question, you need to embrace your catalog marketing efforts until you can answer this question.

• Staffing: Do you have a transition plan for all of the folks who have served your catalog efforts for the past two decades? Contact center and distribution center considerations are not trivial.

• Merchandise Strategy: Can you appropriately forecast sku-level sales if you don't have a catalog driving customers to the online channel? Does the mix of merchandise purchased change between online-only customers, verses online customers fueled by catalog marketing?
  

• Customer File Management: Have you run a five-year simulation of the expected change in your customer file? In other words, will you have enough customers, repurchasing at high-enough rates, spending enough money per repurchaser, to fuel the future of your online business? If you don't know the answer to this question, you need to embrace your catalog marketing efforts until you complete your Multichannel Forensics analysis.